Question: Frozen Vapor. Frozen Vapor of Toulouse, France, manufactures and sells skis and snowboards in France, Switzerland, and Italy, and also maintains a corporate account in Frankfurt, Germany. Frozen Vapor has been setting separate operating cash balances in each country at a level equal to expected cash needs plus two standard deviations above those needs, based on a statistical analysis of cash flow volatility. Expected operating cash needs and one standard deviation of those needs are as follows:
Frozen Vapor's Frankfurt bank suggests that the same level of safety could be maintained if all precautionary balances were combined in a central account at the Frankfurt headquarters.
a. How much lower would Frozen Vapor's total cash balances be if all precautionary balances were combined? Assume cash needs in each country are normally distributed and are independent of each other.
b. What other advantages might accrue to Frozen Vapor from centralizing its cash holdings? Are these advantages realistic?